10 Things to Know About a 1031 Exchange - Pt. 1
Robert G. Hetsler, Jr. J.D. CPA
Inspirational Leader, Spiritual Warrior, Life & Business Strategist, Author, Entrepreneur Talks about #Overcoming Adversity, #Leadership through Inspiration, #Belief System, #Success #Importance of Progress
When it comes to the world of #1031 exchanges, there are many myths and misconceptions floating around out there. But if you’re planning to defer capital gains with this helpful process, you need to understand the basics.
A 1031 exchange allows an investor to swap one business or investment asset for another. Under normal circumstances, the sale of these assets would incur tax liability for any capital gains. However, if you meet the requirements of IRS tax code, section 1031 (hence the name), then you can defer any immediate capital gains tax.
It is important to note that a 1031 exchange is not a tax-avoidance scheme. Eventually, when you sell your business or investment asset and don’t replace it with another “like kind” property, capital gains taxes will be due.
There are many nuances to a 1031 exchange, which is why it is always wise to seek out guidance from a professional experienced with such transactions. Still, if you are curious about the basics, here’s the start of my list of the 10 things you should understand before trying a 1031 yourself. The rest of the 10 will follow in future blogs.
Not for Personal Use
While it may be tempting to consider trading up your primary residence and avoiding capital gains liability, a 1031 is only available for property held for business or investment use.
There Are Some Exceptions to The Personal Use Prohibition
Like most things in the IRS code, there are exceptions to the rule. While generally, personal residences don’t qualify, you may be able to successfully exchange personal property such as your interest in a Tenancy-In-Common or a piece of artwork.
Exchanged Property Must Be “Like-Kind”
This is an area that sometimes confuses new investors. The term “like-kind” doesn’t mean “exactly the same” but merely that the exchanged properties be similar in use and scope. While the IRS rules are liberal, there are many pitfalls for the unwary.
Stay tuned, parts two and three coming soon.
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